Economists Cautiously Applaud a Weaker Dollar

Fretting over the decline of the dollar is nothing new.
But as overseas central banks have begun to act on threats to shift
their reserves to other currencies, the outcry has grown. Doomsayers
warn that the fall of the greenback may seem appealing as a way to lift
exports, but that it could spiral out of control if the government
doesn't get a grip on spending. While economic experts agree that it's
necessary to correct the trade imbalance between the U.S. and export-dependent countries,
the question is how to make that shift.

Despite administration
promises to "keep the dollar strong," more economists joining the camp
making the case that the dollar should be allowed to slide. The
arguments against it, they say, amount to fears over travel costs,
misplaced patriotism, and a counterproductive fear of deficits during a
recession. Below, the best cases for and against the decline:

Dollar Decline Is a Problem for Europe, Not U.S., says Philip Bowring in the International Herald Tribune. "It is only natural for the dollar to be weak. Currency valuation is
part of the solution to global trade imbalances...The United States doesn't need to worry now
about a weak dollar anymore than President Nixon did in 1971. It is
someone else's problem."

Currency Problems Are China's Responsibility, says the economist Kenneth Rogoff
in Canada's Globe and Mail. The U.S.' hands are tied, he says. "Any
real change in the near term must come from China, which increasingly
has the most to lose from a dollar debacle...Chinese leaders clearly
realize that their hoard of T-bills is a
problem. Otherwise, they would not be calling so publicly for the
International Monetary Fund to advance an alternative to the dollar as
a global currency."

But Dollar Is Linchpin of World Economy, says John Tamney at Forbes. "Ultimately the dollar
is the single most important price in the world for its
value--influencing prices and investments on a global scale. When the
dollar is weak, capital chases the inefficient illusion reflected in
assets of the earth over true growth. So in order to fix the global
economy, we must first fix the dollar."

Weaker Dollar Is Key to Recover, says Wolfgang Munchau in the Financial Times. "A lower dollar is desirable because it would help America achieve the
right kind of recovery. The US economy is severely constrained by
household and financial sector deleveraging and possibly by a permanent
fall in potential growth. In the absence of another housing bubble and
consumer boom, an export-led recovery is the best growth strategy the
US could employ."

But a Weaker Dollar Might Spiral Out of Control, warns Yves Smith,
an economic analyst at Naked Capitalism. She responds directly to
Munchau's argument in the Financial Times, saying that straightening
out inequalities in trade with China are desirable. However, she says
the falling price of the dollar is not likely to be the best way to get
there. "Currencies are known for their propensity to overshoot and stay
for
long periods at levels not warranted by fundamentals...To his credit,
Munchau does not see some welcome
weakness of the dollar as a long-term solution; he highlights the need
for structural reforms.
So Munchau is correct, there could be a happy ending here, but I'd be
loath to bet on it."

Conservatives Are Playing Politics With Currency Fears, argues Nobel Prize winning economist Paul Krugman
in the New York Times. Krugman debunks the uproar over the dollar. "The
truth is that the falling dollar is good news. For one thing,
it's mainly the result of rising confidence: the dollar rose at the
height of the financial crisis as panicked investors sought safe haven
in America, and it's falling again now that the fear is subsiding. And
a lower dollar is good for U.S. exporters, helping us make the
transition away from huge trade deficits to a more sustainable
international position. But if you get your opinions from, say,
The Wall Street Journal's editorial page, you're told that the falling
dollar is a terrible thing, a sign that the world is losing faith in
America (and especially, of course, in President Obama)."